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HILLTOP HOLDINGS INC  ( ?????? : HTH)
Q1 2019 Earnings Call
April 26, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Hilltop Holdings First Quarter 2019 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would like to now turn the conference over to Isabell Novakov. Please go ahead.

Isabell Novakov -- Senior Vice President, Investor Relations

Good morning. Joining me on the call this morning are Jeremy Ford, President and CEO; and Will Furr, CFO.

Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, acquisitions, future plans and financial condition, are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties. Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including taxable equivalent net interest margin, prepurchase accounting taxable equivalent net interest margin, tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop-holdings.com.

And now I would like to hand the presentation over to Jeremy Ford.

Jeremy B. Ford -- Chief Executive Officer and President

Thank you, Isabell, and good morning. For the first quarter 2019, Hilltop reported net income of $38.8 million, or $0.41 per diluted share, which represents a 63% increase compared with the $0.25 reported during the same quarter last year. Additionally, Hilltop delivered a return on average assets of 1.2% and return on average equity of 8%. This quarter's strong results are representative of both our commitment to diversified and prudent growth and the hard work by our teams to drive operational efficiencies throughout the organization. This quarter average loans held for investment excluding broker-dealer loans, grew by 10% and average deposits grew by 5% versus prior year. While Hilltop's consolidated net interest margin contracted modestly on a linked quarter basis due to lower purchase accounting and a reduction in non-accrual interest recovery. It expanded by 17 basis points from last year driven by the benefit of higher market rates coupled with disciplined deposit pricing in addition to higher yields on investment securities as a non-bank subsidiary. Also during the quarter, lower rates and recent alignment efforts between the capital markets and structured finance departments yielded a net revenue increase of $28 million versus prior year at Hilltop Securities.

We continue to remain focused on value creation with our book value per share increasing by 6% versus prior year to $21.23, and our capital structure with a Tier 1 leverage ratio of 13.2%. Our credit quality at the bank evidences our risk management efforts as net charge-offs in Q1 2019 of only $1.6 million equated to 10 basis points of average loans. And our non-performing loans decreased to $30.9 million from $34 million at year-end 2018. During the quarter, we had two significant items to call out, including expenses associated with the previously announced leadership changes and costs related to efficiency initiatives across the organization.

Moving to Page 4. Pre-tax income at PlainsCapital Bank increased by $2.6 million, or 7% driven by higher loan yields, partially offset by lower purchase accounting accretion. Our lenders and credit teams continued to do an outstanding job of managing the portfolio as non-performing assets declined to $54 million, or 1.05% of bank loans, down from 1.58% at Q1 2018. Of note, income generated at the bank from the warehouse lines to PrimeLending declined commensurate with the reduction in mortgage origination volumes.

Mortgage pre-tax income of $2.9 million for the quarter improved from a pre-tax loss of $2.7 million in Q1 2018 was a result of relatively stable gain on sale margins of 330 basis points and a reduced fixed cost base. Cost improvements were from lower headcount and other operational enhancements made during the second half of 2018. As we expect volumes to remain under pressure, we will continue to focus on efficiency and profitability. The broker-dealer reported a very strong quarter with a pre-tax margin of 15.8% on increased net revenues of 28% versus prior year. The decline in market interest rates combined with ongoing investments in the business yielded strong trading gains. Additionally, the compensation ratio improved to 60.6% from 64.4% in Q1 2018.

Importantly, Brad Winges joined us in the quarter to become the President and CEO of Hilltop Securities. Brad succeeds Hill Feinberg, who remains with Hilltop Securities as Chairman. We are extremely grateful for the momentous contribution Hill has made to build the quality firm we have today as well as for the contribution Hill will be making to support its continued growth. Likewise, we are very excited to have such a high-caliber leader with deep expertise in our core businesses and look forward to working with Brad and the Hilltop Securities team to advance the capabilities of our firm. Our insurance business reported pre-tax income of $6.8 million for the quarter with a combined ratio of 86.4%. The year-over-year improvement was aided by fair market value gains in the investment portfolio during the current period.

Moving to Page 5. Our platform for growth and efficiency initiatives includes a broad set of projects to enhance our platform and streamline operations with the goal of lowering operating costs and building a foundation for future organic and acquisitive growth. These projects include enhanced business operations, strategic sourcing and shared services. While we expect 2019 to be a heavy investment year and the benefits are largely materialize to 2021, we are encouraged by the progress being made.

For example, the work Todd, Steve and the rest of the PrimeLending team did last year to right-size the middle and back office, while enhancing brands performance has started to payoff, better than expected and are reflected in this quarter's lower costs and improved profitability. Also, our IT organization has been working diligently to unify the newly formed shared services department. And with that has identified contracts and services for consolidation. We are seeing opportunity for us to leverage the size and scale of the Hilltop businesses by combining data centers and bundling core business software.

Another example of our shared services effort is the recent realignment of our risk management department into two cohesive units; operational and risk compliance and enterprise risk and regulatory. We have realized synergies by eliminating the duplication of roles and responsibilities and believe this new model will enhance our risk management and capabilities across the entire company. Overall, I'm very grateful for the commitment of our business leadership and shared services team as well as the response within the organization for what we are building.

Finally, I would like to give a heartfelt thank you to our former Vice Chairman and Co-CEO, Alan White, for his outstanding leadership over the past 31 years. Alan retired on April 1st, and leaves behind a lasting legacy of building relationships and a commitment to culture. In 1988, Alan founded PlainsCapital Bank with one branch in Lubbock and $160 million in assets. Because of his leadership, Hilltop today has $13.7 billion in assets with four complementary businesses and 5,100 dedicated employees. Alan has been a great partner, dear friend and mentor to me and so many others in our organization. We wish him well in his retirement.

I will now turn the presentation over to Will to walk through the financials.

William B. Furr -- Chief Financial Officer

Thank you, Jeremy. I'm starting on Page 6. As Jeremy discussed for the first quarter of 2019, Hilltop reported $38.8 million of income attributable to common stockholders equating to $0.41 per diluted share, representing growth from the prior year period of 63%. During the first quarter, Hilltop's provision for loan losses was approximately $1 million. During the first quarter of 2019, we released the remaining $2 million loan loss reserve related to Hurricane Harvey as the clients that were previously identified as at risk have been -- have seen sufficient improvement in their business performance to remove this reserve. The bank did not incur any credit losses related to Hurricane Harvey. The first quarter provision includes $1.6 million of net charge-offs, or 10 basis points of average bank loan. Credit quality during the quarter remains solid and while we monitor our credit portfolio very closely, we do not currently see any industry or concentrated exposures that are experiencing material deterioration at this time.

During the first quarter, revenue related to purchase accounting accretion was $8.6 million and expenses were $1.9 million resulting in a net purchase accounting pre-tax impact of $6.7 million for the quarter. It is notable that purchase accounting related expenses declined $3.9 million from the prior-year period, principally driven by the absence of any FDIC asset amortization. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions.

Related to the purchased loan accretion, as the purchase loan portfolio balances continue to decline, we expect scheduled interest income related to purchase loan accretion to average between $4 million and $6 million per quarter during 2019. Hilltop's capital position remains strong with a period and Common Equity Tier 1 ratio of 16.75% and a Tier 1 leverage ratio of 13.22%.

Moving to Page 7. Net interest income in the first quarter equated to $109 million, including $8.7 million of purchase loan accretion. Net interest income increased $6 million, or 5% versus the same quarter in the prior year. The growth in net interest income was driven by asset growth principally loan growth, which includes the inquired assets in Houston and an improvement in net interest margin, which expanded by 17 basis points versus the same quarter in the prior year. Net interest margin equated to 3.69% in the first quarter, including 32 basis points of purchase accounting accretion. The prepurchase accounting taxable equivalent net interest margin equated to 3.38%, an improvement of 21 basis points versus the same period in the prior year. While loan yields have increased and as compared to the same period in the prior year, the benefits have been somewhat offset by higher deposit costs.

We remain extremely focused on managing and growing deposits as well as managing closely the rates we pay our clients. As expected, we have seen deposit betas continue to increase even as the Federal Reserve appears to have paused moving rates higher. Hilltop's cumulative beta for interest-bearing deposits from December of 2015 has been approximately 33%. Since the first quarter of 2018, Hilltop's interest bearing deposit beta has been approximately 55%. Given the continued increase in the current period betas, we continue to expect that our overall through the cycle betas will move higher and therefore closer to our model through the cycle beta levels of 50% to 60%.

Further with the recent decline in the tenure rates, we generally -- which generally aligned to mortgage origination rates, we expect that loan held-for-sale yields will decline from the first quarter 2019 levels. While we do believe these factors will continue to pressure the prepurchase accounting taxable equivalent net interest margin throughout the remainder of 2019, we are increasing our full-year prepurchase accounting taxable equivalent NIM outlook to 3.25% plus or minus 3 basis points. We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset liability flows across the portfolios.

Quarterly average net earning assets have remained relatively stable versus the same period in the prior year, increasing by approximately $52 million. While the change in average balances has been modest, a mix shift has occurred as age of our loan growth coupled with the growth in high quality taxable securities has been offset by lower loans held-for-sale, lower repo securities and lower securities for our balances. These shifts reflect both seasonal shifts and business activity for the securities borrowed as well as lower overall mortgage origination activity as it relates to loans held-for-sale.

I'm moving to Page 8. Total non-interest income for the first quarter of 2019 equated to $252 million. First quarter mortgage-related income and fees declined by $8 million versus the first quarter of 2018. During the first quarter 2019, the competitive environment in mortgage banking remained intense as Hilltop's mortgage originations volume declined by $513 million or 17% versus the same period in the prior year. While mortgage volumes were challenged, gain-on-sale margins remained relatively stable during the first quarter at 330 basis points. With the recent decline in the primary mortgage rate, we did see modest improvement in production translated in the quarter. We expect that origination volume for the remainder of 2019 will be in line with 2018 production levels. Further, we also expect the gain-on-sale margins have stabilized and will remain within the current range over the coming quarters assuming consistent market conditions. Other income increased by $28 million driven primarily by improvements in sales and trading activities in both capital markets and structured finance businesses at Hilltop Securities. Favorable market conditions resulted in a 26% increase in trading volumes, improved secondary spreads and an 8% increase in structured finance mortgage-backed securities volume.

I'm turning to Page 9. Non-interest expenses increased from the same period in the prior year by $1 million to $309 million. As Jeremy mentioned, we did have a set of significant charges related to the previously announced leadership changes according to $8 million. In addition, we recognized $700,000 of charges related to ongoing efficiency initiatives occurring across Hilltop. Related to the leadership changes, we do not expect further charges related to these announcements. Over the past 12 months, we have continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise. As a result of these efforts, total FTE have declined by 304, which reduced salaries by $3 million versus the same period in the prior year. Variable compensation increased by $2.6 million compared to the same period in the prior year, driven by growth in net revenues of the securities business somewhat offset by decline in mortgage origination related commissions expense. Further, Hilltop incurred $2.5 million in costs related to ongoing core systems enhancements and we do expect that these related expenses will increase for the remainder of 2019. We continue to position our businesses for long-term success and may take additional efficiency related charges in the future.

I'm moving to Page 10. Total average HFI loans grew by 8% versus the first quarter of 2018. Growth versus the same period prior year was driven by loans acquired in our Houston market during the third quarter of 2018, an increase in real estate lending and growth in our mortgage warehouse lending business. Based on the current production trends competitive environment, our outlook for pay-downs throughout the year and our focus on high quality conservative underwriting, we expect full year average HFI loans to grow 4% to 6% in 2019.

Turning to Page 11. We have added this new asset quality slide to our presentation to highlight recent credit trends and coverage ratios. As previously noted and is shown on the chart on the top right of the slide, the businesses have maintained solid credit quality as non-performing assets have declined approximately $30 million from the same period in the prior year. In reference to the chart on the bottom right of the slide, we highlight our allowance for loan loss -- to loans held for investment ratio equates to 90 basis points at the end of the first quarter 2019. It is important to note that we maintain approximately $95 million of remaining discounts across the purchased loan pools. These discounts provide additional coverage against future losses.

Moving to Page 12. Average total deposits are approximately $8.3 billion and have increased by $432 million versus the first quarter of 2018, including the acquired deposits in the Houston market. Interest bearing deposit costs have continued to increase as competitive pressures remain and clients are actively seeking higher rates of return on their deposits by migrating monies from non-interest bearing and savings products in the higher yielding money market, CD and investment products.

I'm moving to Page 13. During the first quarter of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability generating $42 million of pre-tax income during the quarter. The quarter's results reflect the benefits of the growth in the Houston market, the aforementioned release of the Hurricane Harvey reserves, which equated to $2 million, an improvement in the efficiency ratio versus the prior year period which was driven by revenue growth. The focus of PlainsCapital remains consistent provide great service to our clients, drive profitable growth, while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue growth and expense efficiency.

Turning to Page 14. PrimeLending generated a solid pre-tax profit of $3 million for the first quarter driven by the efficiency efforts at the leadership team at PrimeLending executed during the third and fourth quarters of 2018. While origination volumes declined by 17% versus the same period in the prior year, the combination of back office efficiencies and branch performance management has yielded significant reductions in operating expenses, which declined by approximately $8 million versus the same period in the prior year. Further supporting the improved results is our focus on pricing and fees. Mortgage origination fees have increased from the same period in the prior year by 29 basis points, which yield a small increase in fees versus the prior year even as origination volumes declined. The focus for PrimeLending is to generate profitable mortgage volume, continue to focus on operational efficiencies and successfully launched the new mortgage loan operating system in 2019.

Turning to Page 15. Hilltop Securities had a solid start in 2019 as market conditions improved from the fourth quarter of 2018 and the investments that have been made in structuring sales and distribution are beginning to yield returns. The securities business earned $16 million of pre-tax income driven by strong trading gains in the capital markets and structured finance businesses. While activity was strong in the quarter, results from both of these businesses can be volatile as mortgage rates, spreads and volumes can change significantly from period-to-period. Related to public finance, while revenues did improve modestly versus the same period in the prior year, we are seeing improved business activity and expect 2019 results to continue to improve.

I'm moving to Page 16. National Lloyds recorded $7 million pre-tax profit for the quarter, as the fair market equity marks in the -- during the quarter yielded a $1.2 million gain versus a $1.4 million loss in the same period in the prior year. During the first quarter of 2019, National Lloyds did distribute $21.5 million of dividends to Hilltop bringing the total dividend since 2017 to $68 million.

Finally, I'm moving to Page 17. For 2019, we're maintaining the full year outlook for our key balance sheet and income statement items consistent. As previously noted, we are increasing our prepurchase accounting taxable equivalent NIM outlook by 5 basis points, but that does not change our full year outlook range for net interest income growth. The outlook represents our current expectations with respect to the markets, rates and overall economic activity. These however may change throughout the year and we will provide updates as necessary on our quarterly calls going forward.

Operator, that concludes our prepared comments, and we'll turn the call over to you for Q&A.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Michael Young with SunTrust. Please go ahead.

Michael Young -- SunTrust -- Analyst

Good morning, everyone.

Jeremy B. Ford -- Chief Executive Officer and President

Good morning.

William B. Furr -- Chief Financial Officer

Hi, Michael.

Michael Young -- SunTrust -- Analyst

I wanted to start off just on the broker-dealer, obviously good performance this quarter kind of snapping back from a tough year last year. Can you maybe just give us an update on kind of your total revenue outlook for the year and the pre-tax margin that you provide in the past? Is that a higher rate now you think for the full year?

Jeremy B. Ford -- Chief Executive Officer and President

No. We don't -- so my view is I gave the $360 million or $370 million last quarter. I'd probably just looked to the higher range of that to be conservative. So kind of 370 maybe 380 and pre-tax margin for the year 11%-plus maybe up to 14%. But it's -- I'd say it's early we had a real pop in the structured finance business late in the third quarter, and so I'd be a little tempered. This is not a trend.

Michael Young -- SunTrust -- Analyst

Okay. And could you maybe just talk about at least from the structured finance business or anywhere else kind of within the company as a whole where just the drop in tenure rates really drove some additional revenue or margin that we should not necessarily run rate or expect going forward at the same magnitude?

Jeremy B. Ford -- Chief Executive Officer and President

Yeah, I mean that's what we're talking about. And so in that business we're basically net long on this TBA mortgages. And so when the 10-year (ph) dropped, that gave us a pop, I think it was about $12 million. And so it's a lot of what we suffered through in the first quarter last year went the other way. So that's how I would talk about it. And then on -- just the other thing on the business, I think that the first quarter of 2018 was the real depressed quarter for municipal issuance. We're starting the year stronger and nationwide issuance is up. And if you exclude the Houston team departed, we're up year-over-year as well. So we're feeling good about the momentum that's being built there. And really good about Brad's coming on board and getting his arms around the company and as well as all the employees working with him and get to know him and Hill Feinberg's continued leadership there as well.

Michael Young -- SunTrust -- Analyst

Okay. And maybe just switching to expenses really quickly. You mentioned that this year was going to be a heavy investment year. Obviously, we started off the year pretty strong with good expense control in a number of business units. But can you just help us understand where some of those incremental investments are going to be? And any sort of timing you can provide on when they might be within the year just so we can kind of get that model correctly?

Jeremy B. Ford -- Chief Executive Officer and President

As far as Prime, I think we've articulated it on a fixed-cost basis, we think that we've kind of illustrated the kind of run rate. As far as the other broader platform from growth and efficiency initiatives, it's early, we rolled out the details of the numbers last quarter of going from 89% to 83% efficiency ratio and generating $80 million of revenue and earnings and expense saves out of it, and it's going to be more in the later half or more into 2021, where it will be materialized. So, I don't have -- I wouldn't really -- I don't have anything to tell you right now about how to phase it in through this quarter. We kind of felt like on those things the level of investments going to offset a lot of the savings. Go ahead, Will.

William B. Furr -- Chief Financial Officer

Yes. So, what I would -- what I'd add there, Michael is, we reported kind of in, on Page 9 of our slide deck, core systems improvements of about $2.5 million this quarter. And in my comments noted that we do expect those to go higher. So I would say, as we start the deployment process which we are across a few of those platforms this year we're going to see those expenses that $2.5 million number trend higher really through, through the end of this year.

Michael Young -- SunTrust -- Analyst

Okay. And you will continue to kind of call that out and point that out to us in terms of where that's going to occur and how much?

William B. Furr -- Chief Financial Officer

Yeah, we will continue to be very transparent about what we're spending in that regard.

Michael Young -- SunTrust -- Analyst

Okay, thanks.

Jeremy B. Ford -- Chief Executive Officer and President

Thanks.

William B. Furr -- Chief Financial Officer

Thank you.

Operator

The next question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- KBW -- Analyst

Hey, good morning guys.

Jeremy B. Ford -- Chief Executive Officer and President

Hey, Brady.

William B. Furr -- Chief Financial Officer

Good morning.

Brady Gailey -- KBW -- Analyst

So no buybacks this quarter. I mean the stock trades at 1.1 times tangible. You're nearing 13% TCE. Just wanted to get updated thoughts on how you guys think about the buyback? And why no buybacks this quarter?

Jeremy B. Ford -- Chief Executive Officer and President

To start with the latter part, why no buyback this quarter. Clearly we had some corporate actions that we felt that we were not legally in a position to be doing share repurchases. So we -- that's why we were inactive in the first quarter with the leadership changes. As we look toward the future and obviously the stocks come back a little bit, we have $50 million share authorization and we do plan to be active in the market in the open windows, and so we'll continue to do that as we have. And as we did last year, we had about $60 million of share repurchases.

Brady Gailey -- KBW -- Analyst

Okay. All right. And then I hear you, Will on the core NIM guidance going up 5 basis points. But if you look at the last couple of quarters, your core NIM has been running closer to like in the mid-330 level, I mean, it was 338 this quarter. So what gets the core margin down to the level that you're talking about relative to the recent past?

William B. Furr -- Chief Financial Officer

Yeah. So I think I tried to highlight it in the comments. But the view of ours is, that betas are going to continue to increase on deposits even with the Fed, even if -- presuming the Fed pauses here and kind of rates stabilize we are continuing to see a competitive environment on the deposit side from a couple of different, different competitive sets. Further, as I mentioned the loans held-for-sale yield, which was higher this period, we do expect to be under some pressure given these direct linkage to where the tenure is. And so that while it takes about a quarter for that to pull its way through given funding levels and pace. We do expect those two things in particular to be under pressure. And then loan yields on the core book, if you will are also remaining under pressure in an intensely competitive commercial lending market. And so as we look at it, loan yields both HFI and HFS under pressure and deposit yields also under pressure from a beta perspective. So that's what would take us there. And again as we think about the 3.25% to 3.28% range, that's kind of how we see it right now assuming market conditions stay reasonably consistent with current levels. Obviously, any changes, we would evaluate.

Brady Gailey -- KBW -- Analyst

Okay. All right. And finally, probably my most important question with Alan being retired, I was wondering, if you guys are going to continue with the Halloween video?

Jeremy B. Ford -- Chief Executive Officer and President

Absolutely. We've committed to that.

Brady Gailey -- KBW -- Analyst

That's great. It's weird not to hear Alan's voice on the call. I wish him the best in retirement.

Jeremy B. Ford -- Chief Executive Officer and President

Well, thank you very much and we agree. But we appreciate that.

Operator

Your next question comes from Chris Gamaitoni with Compass Point. Please go ahead.

Chris Gamaitoni -- Compass Point -- Analyst

Good morning, guys.

Jeremy B. Ford -- Chief Executive Officer and President

Hey, Chris. How is it going?

William B. Furr -- Chief Financial Officer

Good morning.

Chris Gamaitoni -- Compass Point -- Analyst

Going well. I wanted to touch on the structured finance business. I completely get the benefit where you have the tenure drop at the very end of the quarter on your hold inventory. What are spreads looking like in April now that the tenure has always been down or not having as much volatility?

William B. Furr -- Chief Financial Officer

I think spreads, and again, I don't want to give kind of quarterly guidance here around Q2. But what I'd say is the market rates had reasonably stabilized at current levels. And so by virtue of that, we expect -- our assumptions going forward and our outlook expectation going forward or the rates remain reasonably stable with the new reset levels after March of this year.

Chris Gamaitoni -- Compass Point -- Analyst

All right. Getting to the expense. If I remember correctly, did you give us a total number of kind of integration or core systems expense for the year?

William B. Furr -- Chief Financial Officer

We have not. And again, part of that is, as we pace through and we work through the final implementation, it's difficult to put an absolute dollar level on it. But what we're saying is this quarter we spent $2.5 million. Historically it's been a little closer to $2 million, and we do expect that to travel higher through the year, quarter-by-quarter, as we work into our implementation and deployment windows.

Chris Gamaitoni -- Compass Point -- Analyst

All right. And another one following up on expenses. If I remember correctly, in the fourth quarter, you attributed I think higher variable comp for mortgage for the year. It looks like you've done a great job at fixing the operations mortgage, you need to be congratulate on that. But it seems like you've really curtailed, call out the money loser loans. So with -- that will make me think that volume, at least down a lot in the first quarter and stable throughout the year is -- variable comps should be down year-over-year if volumes down.

William B. Furr -- Chief Financial Officer

That's correct.

Chris Gamaitoni -- Compass Point -- Analyst

Okay. And then my last one is just on the loan growth guidance is if I just take our average loan growth guidance, if I take the first quarter rate and just assume that you don't grow period-end balances at all for the rest of the year, I could do 6%. It would seem your number has upward bias with just seasonality warehouse lines and I know there's still $1.1 billion of unfunded construction commitments. Can you kind of bridge that gap of why your average loan growth won't be at least mildly higher than your guidance?

William B. Furr -- Chief Financial Officer

Well, I think with the first quarter we're tracking pretty close to where we would have otherwise expected. So by virtue of that, we did see, as I mentioned in my comments an improvement or growth in our mortgage warehouse lending business which we know is seasonal and will trail toward the end of the year. And also, again, contingent upon mortgage volumes in the market. So that's kind of driver -- the first driver of maintaining the guidance where we are relative to the first quarter performance. And then we are seeing an intense pressure around structures and underwriting in our commercial lending businesses. And by virtue of that, while we expect to continue to grow, it will be at a pace that we think is prudent given where the market currently is.

Chris Gamaitoni -- Compass Point -- Analyst

All right. I mean, you don't have an estimate of how much -- I'll take that offline. Thank you so much for the answers. I appreciate it.

William B. Furr -- Chief Financial Officer

Thank you.

Operator

The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good morning.

Jeremy B. Ford -- Chief Executive Officer and President

Hey, Brett.

William B. Furr -- Chief Financial Officer

Hi.

Brett Rabatin -- Piper Jaffray -- Analyst

I wanted to first ask, just follow-up on mortgage, I guess I'm surprised -- I guess, there's been mixed results from some various banks this quarter on mortgage. But you guys are a strong player in that market, and I kind of get that guidance around gain-on-sale not improving. But I guess, I expected you to talk about higher fee income level this year. And I guess, I'm just still struggling a little bit with the guidance around fee income and mortgage. And just like why you're not expecting higher volumes than you had last year?

William B. Furr -- Chief Financial Officer

So as it relates to just both the fees, so volume first quarter -- origination volume first quarter was down 17% year-on-year, which is a little over $0.5 billion. So as you think about kind of the rest of the year at our -- what we expect. We expect that to look like it's going to travel in line with 2018 levels of production which is obviously an improvement versus what has been down year-on-year to this point. That's Part A. In terms of our overall non-interest income guidance of 1% to 3%, as Jeremy mentioned, we did see strong activity in our capital markets and structured finance businesses in Hilltop Securities. But we do recognize that a portion of that was driven by the rate -- the late rate movement in March and without a significant additional rate movement you wouldn't expect that to be recurring. And then the next portion of that is the mortgage business generally both TBA as well as our mortgage origination business generates a large portion of its fees in the second quarter and third quarters. And so as a result of that, we need to -- we're still cautiously optimistic that production volumes will be stronger through the second quarter and third quarters of this year. But given the preponderance of that fee income generation in those quarters, we think it's prudent to maintain guidance at the current level.

Jeremy B. Ford -- Chief Executive Officer and President

Yeah. And just a follow-up on that. I think, maybe a little bit more specific to mortgage and PrimeLending. The gain on sale margins relative -- a little bit off from last year, 4 basis points, but they've done a great job of increasing their mortgage loan origination fees on a per-unit basis. That's up 19 basis points year-over-year.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then I guess the other question I wanted to ask is you're going through an expense initiative and I think you guys are doing a pretty good job at working on that very early. Could you maybe give us some color on just how you might expect the efficiency ratio to trend over the next year? As we think about 2020, like what's a realistic goal, whether it's in 4Q 2019 or 2020 like where do you think the efficiency ratio can get to?

Jeremy B. Ford -- Chief Executive Officer and President

You're talking about on a consolidated basis?

Brett Rabatin -- Piper Jaffray -- Analyst

Correct.

Jeremy B. Ford -- Chief Executive Officer and President

Yeah, I mean we just don't have that to give right now. I think we're -- we try to articulate is where we're trying to go. And as we get closer with just one quarter end we'll be able to articulate the shape of that curve more.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then maybe just one last one for me. Just on Houston. I just wanted to hear, I know you've been spending money on Houston and trying to grow Houston. Can you talk about Houston vis-a-vis the rest of profile of the company and just how much of the growth either in 1Q or this year? How much of that's going to be Houston-focused?

Jeremy B. Ford -- Chief Executive Officer and President

As far as -- OK, so, I think...

Brett Rabatin -- Piper Jaffray -- Analyst

Commercial bank, not other stuff.

Jeremy B. Ford -- Chief Executive Officer and President

Yeah. I think that we had -- well, first of all, we're really pleased with the integration and the leadership there. And Andy Lane and Jerry Brewer and Mark Troth, they've really come together and we've got one cohesive unit in Houston that's doing a great job. And I think they're building a business and it's not a hockey stick. And at the same time -- so in the first quarter, I think the loan growth there wasn't maybe significant. But we do see some opportunities and some things that are actually getting through credit process right now and got to be funding that are really pointing toward there's a level of growth that we articulated and want there.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Great. Thanks for the color.

Jeremy B. Ford -- Chief Executive Officer and President

Thank you.

Operator

This concludes our question-and-answer session. The conference has also concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 42 minutes

Call participants:

Isabell Novakov -- Senior Vice President, Investor Relations

Jeremy B. Ford -- Chief Executive Officer and President

William B. Furr -- Chief Financial Officer

Michael Young -- SunTrust -- Analyst

Brady Gailey -- KBW -- Analyst

Chris Gamaitoni -- Compass Point -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

More HTH analysis

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